The Effect of Corporate Governance on Financial Performance of Commercial Banks Listed at the Nairobi Securities Exchange

Abstract

Good corporate governance practices enable banks to build public trust and confidence which in turn influences their performance. Good corporate governance influences shareholder value over the long term. Corporate governance of banks is important since commercial banking operations are not as transparent as other firms. The bank‟s balance sheets and income statement do disclose information in a way that do not clearly reveal some details. Therefore, the depositors cannot constrain managerial decisions since they lack the necessary information to do so. Such information is very costly to reveal. The study examined the Corporate Governance factors namely; Shareholders rights, transparency and disclosure and Board operation on financial performance of commercial banks quoted at Nairobi Securities Exchange (NSE) in Kenya. The aim of the study was to establish the effects of corporate governance elements on financial performance of commercial banks quoted at Nairobi Securities Exchange (NSE). A descriptive design was used in this study. The population involved in this study was all the 10 commercial banks quoted at Nairobi Securities Exchange (NSE) in Kenya for the period 2011 to 2015. Primary data were obtained by administering questionnaires to CEOs of the banks. Secondary sources were also used to obtain information; data from the published annual reports and company sources spanning five years. The content validity of the two instruments of data collection was assured by ensuring that each of the items in the questionnaire addressed specific contents and objectives of the study. Multiple Regression Analysis was used to establish whether a relationship exist between corporate governance and financial performance. Spearman Correlation Coefficient was used to determine the magnitude of the relationship between corporate governance and financial performance. The findings of the study shows that corporate governance practices have significant effect on financial performance of banks. From the findings, corporate governance factors; shareholders rights, transparency and disclosure and board operation accounts for 52.1% of the financial performance of commercial banks, derived from adjusted R square value of the regression test.